By Lauren Bailey
The Pennsylvania State Employees’ Retirement System is investing $130M in a private equity fund, along with an additional $20M allocated to a sidecar co-investment vehicle.
During a recent investment committee meeting, the pension plan approved the allocation to the Arcline Capital Partners IV LP fund, which is within the buyouts sub-class and would represent 2.3% of the pension plan’s private equity portfolio. As of Sept. 30, 2024, SERS’ market value of buyout investments was approximately 53.4% of the private equity portfolio. The sidecar allocation will also be invested in Arcline through one or more underlying portfolio companies.
Founded in 2018, Arcline is focused on investments surrounding industrial infrastructure, with extensive experience in the aerospace and defense, industrial infrastructure, industrial technology, machinery and aftermarket analysis.
In the meeting, PennSERS’ consultant, RVK, recommended the plan approve the asset allocation, pointing out that the unique capital markets environment is ideal for a refocus on private equity. “Volatility is up, . . . although it’s not near any kind of level that you would consider crisis levels, it is a stark difference [from] previous years,” said Jim Voytko, the consultancy’s principal, director of research and senior consultant.
“The U.S. dollar is starting to decline . . . [and] international stocks are outperforming U.S. stocks this year for the first time in years. . . . This is shaping up to be, perhaps, the year in which diversification really matters quite a lot to institutional portfolios.”
SERS’ investment committee staff noted the commitment to Arcline aligns with the pension fund’s Strategic Investment Plan initiative of making fewer but larger commitments to top-tier managers.
RVK also noted that fixed income is increasingly becoming a key allocation in the current market environment. While there has been high concentration in U.S. equity, “Magnificent Seven” stocks are beginning to decline slightly in market dominance, said Voytko, adding, while higher interest rates has helped keep inflation at bay, investors have been able to demand higher yields from longer-dated fixed income vehicles.
“The lesson for investors is that, for the first time in many, many years, fixed income is actually making a meaningful contribution to investment returns. . . . In terms of allocation, we think . . . fixed income is a more meaningful competitor to equity these days.”
Indeed, Tony Johnson, a principal and senior consultant at RVK agreed during his segment of the presentation. “We believe that the low environment for fixed income, [that has lingered] for so long since the great financial crisis, is finally starting to emerge where interest rates are rising and the benefits of fixed income are actually starting to show. We believe going forward, it should be far more contributory to the asset allocation.”
During a separate board meeting held earlier this month, PennSERS’ consultant, EY, shared a proposal for the implementation of a robust risk management framework designed to understand systemic risks across all of the plan’s business channels — investments, operations, funding, governance, legal and reputational.
“We want to protect the health and trust that has been so hard fought,” said Dan Bender, managing director of EY. “This is [an] ongoing process. The long-term sustainability and accountability . . . is perpetual. This is not . . . a seven-year investment in a private equity fund. This is a perpetual and sacred process. . . .”
Among the risks he outlined were auditing third-party service providers and their policies. “There are certain activities that you own, and that’s fine, but even in those activities, if you’re supported by a third-party technology provider or application provider, it becomes really critical and important to oversee that scenario planning and then [conduct] policy reviews.”
As well, he noted that artificial intelligence was a critical area in risk management. “It’s always a good time to think about the questions . . . that’ll drive some of your own standards with respect to [AI] use — certainly, how are others using it and how does it impact their outcomes? It is becoming a really important aspect of oversight.”
The pension plan’s board will also be recruiting a chief risk officer, which it hopes to have in place once the risk management framework is developed.
“Generally speaking, chief risk officers are a critical function, with a lot of focus on the framework, a lot of focus on helping and advising you and others on what risk policies are needed and the standards that are needed,” said Bender.
